The Securities and Exchange Commission (SEC) has charged the investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed.
The failure has resulted in a misstatement to investors of the net asset values (NAVs) of those funds.
The move by the regulator shows yet another avenue that banks must consider as the number of securities legislation continues to build.
In its latest move, the SEC found that during a two-week period, UBS Global Asset Management (UBSGAM) did not follow the mutual funds’ fair valuation procedures in pricing certain illiquid fixed-income securities in the portfolios of the mutual funds.
“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Jo Gillette, regional director of the SEC’s Chicago Regional Office. “Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”
According to the SEC’s order instituting administrative proceedings against UBSGAM, the firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of roughly $22 million.
Most of the securities were part of subordinated tranches of non-agency MBS whose underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in these bonds guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac. The securities purchased also included ABS and CDOs.
The SEC’s order finds that following the purchases, all but six of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100% higher.
The valuations used by UBSGAM were provided by pricing sources (broker-dealers or a third-party pricing service) that did not appear to take into account the prices at which the mutual funds had purchased the securities. Some of the broker-dealer quotations were based on the previous month-end pricing; other quotes were stale and not priced daily.
UBSGAM did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee more than two weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources.
By using the valuations provided by broker-dealers or a third-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures, according to finding under the SEC investigation.
The procedures required the securities to be valued at the transaction price until UBSGAM received a response to a price challenge based on the discrepancy identified in the price tolerance report, or UBSGAM made a fair value determination. The procedures provided that the transaction price could be used for up to five business days until a decision needed to be made to determine the fair value.
"By failing to implement these procedures, UBSGAM aided and abetted and caused the funds to violate Rule 38a-1 under the Investment Company Act," the SEC report stated.
The SEC’s order further finds that because the securities were not properly or timely priced at fair value, the NAVs of the funds were misstated between one cent and 10 cents per share for several days in June 2008.
UBSGAM agreed to pay $300,000 to settle the SEC’s charges.
In June last year, the SEC mounted its case against Countrywide. The regulator charged former Countrywide Financial CEO Angelo Mozilo and two other former executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.